The Hightower Report

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The action in the stock market yesterday appeared to be an example of the market viewing the glass as half full, as prices made a lot out of little in the headlines. Certainly one can suggest that US currency market operations were a positive for the global economy and certainly the US numbers yesterday were not as weak as expected. However, there is a widespread feeling that the consumer continues to hold back spending aggressively in the face of the uncertainty and that in turn should make the Personal Spending reading this morning one of the more important readings of the week. With the market starting out on a slightly negative note this morning, we suspect that even a slightly disappointing reading will add to the downside tilt. In fact, we think that the market is seeing more than enough evidence of slowing to at least send stock prices back to the middle of the last month’s consolidation zone. At the highs yesterday, a number of stock measures were almost at an upside breakout point on the charts and while the US, Chinese and Japanese rate cuts are helpful, we are not sure that the easing moves will be able to head off the slowing that is already front loaded into the equation. The ECB’s Ordonez yesterday suggested that developed countries were entering a sharp slowdown, but yet the ECB can’t seem to step up to the plate and cut interest rates and that would seem to leave at least a portion of the global economy mired in a contractionary spiral.

DOW: Around the prior session’s highs, the Mini Dow was almost into an upside breakout and that is a very surprising development. The bulls would rationalize the relative level of the market at this week’s highs, by suggesting that the market overshot on the downside at this month’s lows and that seeing economic readings that are not as bad as expected, gives validity to the view that stocks at the October lows were undervalued. However, given that the markets can’t know how long or deep the slow down will be and certainly the markets don’t know if the financial contagion has been quarantined, we think that prices are currently too expensive. In fact, unless the US numbers this morning manage another “not as bad as expected” result this morning we would expect the Mini Dow to at least drift back down to the middle of the last month’s consolidation. Near term downside targeting is seen at 8,987 and then down at 8,873. In order to send the market below the aforementioned support levels, probably requires a fresh financial contagion issue or an extremely discouraging set of personal spending readings.

NASDAQ: It should be noted that the December Nasdaq did manage a new high for the move this week and that action somewhat erased the pattern of lower highs that was in place since the October 14th spike up rally. However, with the Bank of Japan overnight suggesting that (a harsh storm seen only once in 100 years is raging) we have to think that Nasdaq longs entering the market at current levels are assuming a very poor risk and reward setup. In fact, the December Nasdaq could slide down to 1272 without any damage to the charts. The fact, that the crisis is indeed showing up outside of the US and the fact that the US is starting to see a number of layoff announcements in every trading session, would seem to give the edge back to the bear camp. Initial support levels in the December Nasdaq are seen at 1294, 1272 and then again down at 1250.

S&P 500: Like the rest of the market, the S&P early this week was almost into an upside breakout on the charts! However, for the last two sessions, the market has seen a resumption of a lower high pattern and it would still seem like the path of least resistance in prices is pointing downward. As suggested before, the flow of scheduled US numbers this morning will be very critical and unless the market sees a better than expected Personal Spending reading, we doubt that the market will end the week on a positive note. In fact, initial downside targeting in the S&P is seen at 927.50 and then again down at 917.10.

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The market is likely to remain volatile over the near-term but commodity markets in general seemed to have turned the corner. Weakness in the energy sector will remain a concern for the market but it appears that a long and intense recession may have been avoided with the US and world stimulus to banks, credit issues and the monetary base. Economic data is likely to remain poor but commodity prices may have recently priced-in a major recession and overshot fair value. The weaker currency in Europe helped pressure London futures while the rollover to the downside in crude oil helped US sugar set-back from the highs yesterday. While spillover support from firmer equity markets and Wednesday’s Fed rate cut initially provided a lift to March sugar to start off higher yesterday, gains were cut short by a rebound in the Dollar, a slide in oil prices and more bearish economic news. Month end book squaring and portfolio adjustments was given as the primary reason for the Dollar’s comeback which diminished the appeal of physical commodities such as sugar. But we suspect the sugar market was also pull back by the US 3rd quarter GDP showing a 3.3% drop in consumer spending and certainly leaves the demand environment bearish. With still no word on whether the US will import more sugar, the market may lack a bullish catalyst unless the Dollar trades sharply lower. Tight global credit conditions are still a problem that is restraining trade as the market deals with the potential for defaults from smaller companies who bought ahead of the late September/early October break. Open interest continues to decline and it would be a positive sign to see some stability or even higher open interest ahead.

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The market is seeing a strong rally off of the lows with talk of better demand and talk of the weaker dollar helping to boost exports. However, the market is still faced with slowing pork, poultry and beef exports and this can still force too much meat on the domestic market at the same time. In addition, the surging dollar could spark an increase in beef imports over the near-term. While traders are talking about better consumer sentiment, boxed beef cutout values were down 75 cents at the mid-session yesterday and closed $1.24 lower at $141.71. This was down from $144.38 a week ago. Tighter supply of market ready cattle this week did help to boost cash cattle prices by $1.00 to $92.00 and volume was seen as active. The market drove sharply higher on the session yesterday as there was relief from the aggressive selling pace of index funds and then new short-covering from managed fund traders helped to support. A bounce in the beef market, ideas that consumer spending on beef could pick-up a bit with more stable stock markets and the discount of futures to the cash market helped support. Talk of declining production ahead and the surge higher in the stock market added to the more positive tone. The estimated cattle slaughter came in at only 110,000 head yesterday. This brings the total for the week so far to 365,000, down from 381,000 last week at this time and down from 387,000 a year ago. Rallies look like selling opportunities with uncertain demand and hefty total meat supply.

The idea that consumer spending will increase and that exports will be enhanced by a turn lower in the US dollar may be wishful, or at least optimistic, thinking. Total meat supply relative to production and exports seems to be well above total demand and cold storage supply is already high.

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Crude oil has made an attempt to trade higher overnight, but the bull camp’s grip on the market also looks to be slipping a bit. Another sharp break in the dollar overnight has helped the crude oil carve out some follow through gains from yesterday’s rally and that is certainly a critical factor supporting crude oil prices. The strength in the energy complex this week seems to be part of a broad based recovery effort across many markets as the weak action in the Dollar and relatively cheap commodity prices appear to be luring some investors back to physical commodities as an inflation hedge. But unless the Dollar continues to weaken, the bull camp in crude oil could lose its edge. OPEC’s threat to make deeper supply cuts and yesterday’s lower than expected rise in crude oil stocks may be adding to the market’s positive tone. It also appears the Fed’s rate cut is somewhat helping to temper the extreme bearish outlook for the economy and that seems to be providing a measure of support to crude oil. With other central banks also expected to follow the Fed’s move, an easing in global credit conditions does seem to be taking place, at least for now, therefore the incredibly grim outlook for oil demand, that energy markets were pricing in last week seems to be in question. In fact, rate cut expectations yesterday and the view the Fed may be able to orchestrate a softer economic landing enabled the energy complex to push aside the fact that the demand environment for oil remains very weak, especially with the EIA showing total product demand falling 7.8% below year ago levels. But overnight gains in crude oil have been relatively modest and with the market running into overhead resistance above the $70 price level, crude oil’s technical momentum seems to be stalling a bit. In fact, if today’s 3rd quarter GDP reading, expected to show a contraction in growth, comes in weaker than expected that could begin to derail the bull camp and revive economic doubts again. While Dec crude oil has the technical capacity to move higher, the market’s ability to make a strong push above $70 and launch a fuller recovery back to the $75 to $80 price range will likely require sustained bullish action from outside markets, particularly a deeper slide in the Dollar and strong upward leadership from equity markets. Otherwise, the technical correction in Dec crude oil could be cut short well under the $75 level.

GASOLINE: Dec gasoline has also attempted to trade higher overnight, but like crude oil the market’s upward momentum seems to be stalling a bit. While yesterday’s rate cut may eventually help to improve the demand environment for gasoline, it hasn’t definitively lifted the economic uncertainty yet. Unless more economic confidence can be restored by seeing better than expected economic data or an even stronger recovery in the equity markets, the gasoline market is still facing a reality that demand last week was 3.4% below a year ago. Although the unexpected 1.5 million barrel decline in gasoline stocks did help temper the weak demand reading. On a technical basis there is certainly the potential for Dec gasoline to trade back to $1.75 given the market’s oversold condition. But the bull camp’s resolve will certainly be tested this session with the release of the 3rd quarter GDP and Jobless claims readings especially since very negative readings could quickly shift control back to the bear camp.

HEATING OIL: The heating oil market has also backed away from overnight highs and we suspect seeing more weak economic readings from Europe may be limiting gains. Despite expectations for another round of coordinated global rate cuts, it seems as if the heating oil market may be finding it difficult to look beyond the current bearish situation. In fact, the larger than expected 2.325 million barrels gain in US distillate stocks and distillate demand down 5.2% from year ago may be hindering the market’s technical recovery. A mild temperature outlook may also be a limitation for the bull camp and if weaker than expected economic news is seen today it won’t be surprising to see Dec heating oil dip back below $2.00. Given the strength in the equity markets and weak action in the Dollar, the gains in the energy complex so far are a bit disappointing. Trading could get volatile due to month end and the expiration of the Nov product futures contracts at the end of the week.

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CORN: Net weekly export sales for corn, came in at 413,100 metric tonnes for the current marketing year and none for the next marketing year for a total of 413,100. As of October 23, cumulative corn sales stand at 32.8% of the USDA forecast for 2008/2009 (current) marketing year versus a 5 year average of 36.1%. Sales of 764,000 metric tonnes are needed each week to reach the USDA forecast.

SOYBEANS: Net weekly export sales for soybeans came in at 1,457,300 metric tonnes for the current marketing year and none for the next marketing year for a total of 1,457,300. As of October 23, cumulative soybean sales stand at 49.9% of the USDA forecast for 2008/2009 (current) marketing year versus a 5 year average of 45.9%. Sales of 321,000 metric tonnes are needed each week to reach the USDA forecast.

SOY MEAL: Net meal sales came in at 130,200 metric tonnes for the current marketing year. Cumulative soybean meal sales stand at 30.0% of the USDA forecast for 2008/2009 (current) marketing year versus a 5 year average of 33.6%. Sales of 112,000 metric tonnes are needed each week to reach the USDA forecast.

SOYOIL: Cumulative soybean oil sales stand at 16.0% of the USDA forecast for 2008/2009 (current) marketing year versus a 5 year average of 20.8%. Sales of 18,000 metric tonnes are needed each week to reach the USDA forecast.

WHEAT: Net weekly export sales for wheat, came in at 460,400 metric tonnes for the current marketing year and 36,000 for the next marketing year for a total of 496,400. As of October 23, cumulative wheat sales stand at 69.2% of the USDA forecast for 2008/2009 (current) marketing year versus a 5 year average of 58.6%. Sales of 266,000 metric tonnes are needed each week to reach the USDA forecast.

COTTON: Net weekly export sales for cotton, came in at 57,100 running bales for the current marketing year and 500 for the next marketing year for a total of 57,600. As of October 23, cumulative cotton sales stand at 53.4% of the USDA forecast for 2008/2009 (current) marketing year versus a 5 year average of 44.2%. Sales of 141,000 running bales are needed each week to reach the USDA forecast.

BEEF: Weekly US beef export sales for the week ending October 30 came in at 8,600 metric tonnes making it 488,400 metric tonnes for the year. This compares to year ago weekly sales of 9,800 metric tonnes and 375,100 for the year. Before Mad Cow (2003) cumulative sales as of this week were 728,300 metric tonnes.